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The pace of consolidation heated up in the telecoms industry on Monday as Nokia and Siemens agreed to create the world’s third-largest network equipment supplier in a move that puts a trio of companies far ahead of rivals.
Alcatel-Lucent, Ericsson-Marconi and Nokia Siemens Networks will all have more than double the revenues of competitors such as Nortel, Motorola and Huawei who may now come under pressure to seek deals themselves.
This marks the first strategic decision by Nokia’s new chief executive, Olli-Pekka Kallasvuo. It also represents a symbolic break with telecoms by Siemens, founded 160 years ago as a telegraphy firm.
The Finnish and German groups are creating a 50-50 joint venture despite Siemens bringing €9.2bn ($11.6bn) of the €15.8bn annual revenues and 40,000 of the 60,000 workers. But Siemens’ telecoms business has much lower operating profit than Nokia’s, leading the German group to believe its half stake was the best deal possible.
Synergies of at least €1.5bn are to be targeted by 2010 and 6,000-9,000 jobs are likely to be cut, with the new company taking a restructuring charge of €1.5bn.
“The deal is flawless – a new titan emerges,” Klaus Kleinfeld, Siemens’ chief executive, told the FT as he described the combination as “the best we could come up with” for his struggling division.
The joint venture will be based in Helsinki while Nokia has named its head, Simon Beresford-Wylie, and will take the lead in management issues.
Some analysts believe Nokia could in future take full control and bankers said the joint venture – valued at about €20bn before synergies – was likely to become a stand-alone company eventually either through an IPO or a buy-out of one of the partners as it would be too big on its own.
“It is a Fortune 300 company already,” said Mr Kallasvuo.
The two companies have little customer overlap and believe antitrust approval should pose few problems. The company is targeting the so-called convergence between mobile and fixed networks and believes its scale will help it in dealings with telecoms companies.
As part of the deal, Siemens will in the coming months sell its enterprise networks business, which has sales of €3.5bn, for about €1bn-€1.5bn either to a strategic buyer or a private equity fund with interests in the sector.
Shareholders in Siemens reacted positively sending the stock up 6.7 per cent while Nokia rose 3 per cent.
Siemens was advised by Morgan Stanley and Nokia by Citigroup.